Fannie Mae 2008 Annual Report Download - page 292

In order to determine if an entity is considered a VIE, we first perform a qualitative analysis, which requires
certain subjective decisions regarding our assessments, including, but not limited to, the design of the entity,
the variability that the entity was designed to create and pass along to its interest holders, the rights of the
parties and the purpose of the arrangement. If we cannot conclude after qualitative analysis whether we are the
primary beneficiary, we perform a quantitative analysis. Quantifying the variability of a VIE’s assets is
complex and subjective, requiring analysis of a significant number of possible future outcomes as well as the
probability of each outcome occurring. The result of each possible outcome is allocated to the parties holding
interests in the VIE and, based on the allocation, a calculation is performed to determine which, if any, is the
primary beneficiary.
Qualitative analyses were performed on certain mortgage- and asset-backed investment trusts. These analyses
considered whether the nature of our variable interests exposed us to credit or prepayment risk, the two
primary drivers of expected losses for these VIEs. For those mortgage-backed investment trusts that we
evaluated using quantitative analyses, we used internal models to generate Monte Carlo simulations of cash
flows associated with the different credit, interest rate and housing price environments. Material assumptions
include our projections of interest rate and housing prices, as well as our expectations of our prepayment,
default and severity rates. The projection of future cash flows is a subjective process involving significant
management judgment. This is primarily due to the inherent uncertainties related to the interest rate and
housing price environment, as well as the actual credit performance of the mortgage loans and securities that
were held by each investment trust. If we determined an investment trust to be a VIE, we consolidated the
investment trust when the modeling resulted in our absorption of more than 50% of the variability in the
expected losses or expected residual returns.
We also quantitatively and qualitatively examined our LIHTC partnerships and other limited partnerships.
Qualitative analyses considered the extent to which the nature of our variable interest exposed us to losses. For
quantitative analyses, internal cash flow models were also used to determine if these were VIEs and, if so,
whether we were the primary beneficiary. LIHTC partnerships are created by third parties to finance
construction of property, giving rise to tax credits for these partnerships. Material assumptions include the
degree of development cost overruns related to the construction of the building, the probability of the lender
foreclosing on the building, as well as an investor’s ability to use the tax credits to offset taxable income. The
projection of these cash flows and probabilities thereof requires significant management judgment because of
the inherent limitations that relate to the use of historical data for the projection of future events. Additionally,
we reviewed similar assumptions and applied cash flow models to determine both VIE status and primary
beneficiary status for our other limited partnership investments.
We are exempt from applying FIN 46R to certain securitization trusts if the trusts meet the criteria of a QSPE,
and if we do not have the unilateral ability to cause the trust to liquidate or change the trust’s QSPE status.
The QSPE requirements significantly limit the activities in which a QSPE may engage and the types of assets
and liabilities it may hold. Management judgment is required to determine whether a trust’s activities meet the
QSPE requirements. To the extent any trust fails to meet these criteria, we would be required to consolidate its
assets and liabilities if, based on the provision of FIN 46R, we are determined to be the primary beneficiary of
the entity.
We are required to evaluate whether to consolidate a VIE when we first become involved and upon subsequent
reconsideration events (e.g., a purchase of additional beneficial interests). Generally, if we are the primary
beneficiary of a VIE, then we initially record the assets and liabilities of the VIE in our consolidated financial
statements at fair value. For entities that hold only financial assets, any difference between the fair value and
the previous carrying amount of our interests in the VIE is recorded as “Extraordinary gains (losses), net of
tax effect” in our consolidated statements of operations, as required by FIN 46R. However, if we are the
primary beneficiary upon creation of a VIE to which we transferred assets, the basis in our interests in the
F-14
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)